Crypto’s original sin: Trading decentralization for growth

This is a segment from the 0xResearch newsletter. To read full editions, subscribe.

---

“What if the internet had had a decentralized payments system from day one?”

This is one of the crypto industry’s favorite thought experiments.

It may surprise you to know it was almost a reality.

Legendary cryptographer and computer scientist David Chaum founded the company DigiCash in 1990, which produced the digital payment system “ecash.”

Ecash was revolutionary in its time. The payments system relied on “blind signatures,” a kind of cryptography that allowed anonymous payments between users (though it would’ve been on traditional banking rails).

There are various reasons ecash failed to take off, but legend has it that its lack of expansion was primarily due to Chaum’s reluctance to sacrifice on principles of decentralization and privacy. 

Based on the history recounted in the seminal book Cryptoassets, Chaum turned down $50-100 million deals from not one, but three, major institutions — Microsoft, Netscape and Visa — seeking to integrate ecash into the early internet.

DigiCash eventually declared bankruptcy in 1998, and Web2’s walled gardens went up, presaging crypto’s perennial tension between its libertarian principles and growth.

As a growth industry, we want to build for the mainstream to attract more users. But that brings concessions or tradeoffs that can be tough to justify.

Take, for example, Ethena’s announcement of its “Converge” chain” with Securitize last week.

Not only is Converge a whole new L1 chain in itself (and not an Ethereum L2), but DeFi applications building on Converge will be “vetted by Ethena and Securitize via a whitelist,” Ethena’s official blog reads. Its validators will be a permissioned set “composed of traditional finance entities and centralized exchanges” staking ENA.

Decentralization maximalists will find a lot to pound the table about. Bankless’ David Hoffman called out Converge for being another permissioned chain and what he perceives as a regression from traditional banking.

Most of the $19 billion onchain tokenized real-world assets today are walled off from the rest of DeFi for compliance reasons, and not composable with the innovation machine that is DeFi.

Converge needs its own settlement layer so that it can fence itself off for its TradFi clients to integrate with permissioned DeFi liquidity. That’s difficult on Ethereum today.

So herein lies the dilemma — the same one Chaum faced:

• Do we want to grow the pie of onchain wealth quickly by making it accessible to TradFi? or
• Do we want to pursue the far more arduous task of courting marginal organic growth to permissionless DeFi? (Spoiler alert, the latter option is running its limits.)

The dilemma points to the harsh reality Vitalik once pointed out: DeFi is a circular ouroboros of capital chasing yields and airdrops.

Ethena founder Guy Young basically conceded the point when he said Ethena “no longer has any interest in shuffling around the same chips between each other. We need to think bigger.”

If the goal was reaching the mainstream masses, onboarding TradFi at the incremental expense of crypto’s libertarian ethos is inevitable.

And Ethena, of course, is not the only crypto business making that tradeoff. Pendle, too, announced its desire last month to roll out a KYC’d yield-trading product for regulated entities.

Last week, Coinbase also announced “Verified Pools” as a way for KYC’d institutions to trade on segregated Uniswap liquidity pools, made possible by its v4 “hooks.”

Trading off decentralization sucks, but one can also appreciate the ambition for growth.

The silver lining is that some of these centralized initiatives may spur positive externalities that would eventually spill over into DeFi innovation.

Markets work in unpredictable ways. I like decentralization. But I also don’t want DeFi to go the way of David Chaum’s ecash.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your morning with the top news and analysis to inform your day in crypto.
• Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
• 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
• Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
• The Drop: For crypto collectors and traders, covering apps, games, memes and more.